<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-29816
Triad Hospitals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2816101
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13455 Noel Road, Suite 2000
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
(972) 789-2700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Commission file number 333-84743
Triad Hospitals Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0389776
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13455 Noel Road, Suite 2000
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
(972) 789-2700
(Registrant's telephone number, including area code)
Not Applicable
(Former name or address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock of the latest practical date.
As of October 31, 2000, the number of shares of common stock of Triad Hospitals,
Inc. outstanding was 34,708,407, and all of the shares of common stock of Triad
Hospitals Holdings, Inc. were owned by Triad Hospitals, Inc.
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the periods ended September 30, 2000 and 1999
Unaudited
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
------------ ------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 301.3 $ 321.3 $ 915.4 $ 1,029.0
Salaries and benefits....................................... 125.4 134.8 376.2 438.3
Supplies.................................................... 44.7 48.7 136.9 151.3
Other operating expenses.................................... 63.4 72.2 192.7 233.2
Provision for doubtful accounts............................. 28.4 26.0 78.1 93.6
Depreciation................................................ 19.2 23.1 57.0 72.4
Amortization................................................ 1.7 1.3 5.1 6.3
Interest expense allocated from HCA......................... -- -- -- 22.5
Interest expense............................................ 16.0 19.5 47.4 29.8
Interest income............................................. (1.6) (0.8) (4.5) (1.5)
ESOP expense................................................ 2.0 1.6 4.7 2.1
Management fees allocated from HCA.......................... -- -- -- 8.9
Gain on sale of assets...................................... (0.2) (16.9) (4.6) (16.9)
Impairment of long-lived assets............................. -- 4.6 0.9 38.5
----------- ----------- ----------- -----------
Total operating expenses.................................... 299.0 314.1 889.9 1,078.5
----------- ----------- ----------- -----------
Income (loss) before minority interests, equity in
earnings and income tax (provision) benefit.............. 2.3 7.2 25.5 (49.5)
Minority interests in earnings of consolidated entities..... (1.9) (2.3) (6.3) (7.0)
Equity in earnings (loss) of affiliates..................... (0.2) (0.9) (0.6) (2.4)
----------- ----------- ----------- -----------
Income (loss) before income tax (provision) benefit......... 0.2 4.0 18.6 (58.9)
Income tax (provision) benefit.............................. (1.2) (2.2) (10.5) 15.3
----------- ----------- ----------- -----------
Net income (loss)........................................... $ (1.0) $ 1.8 $ 8.1 $ (43.6)
=========== =========== =========== ===========
Income (loss) per common share:
Basic................................................... $ (0.03) $ 0.06 $ 0.26 $ (1.43)
=========== =========== =========== ===========
Diluted................................................. $ (0.03) $ 0.06 $ 0.24 $ (1.43)
=========== =========== =========== ===========
Weighted average shares used in income (loss) per
share calculations
Basic................................................... 31,883,620 30,956,415 31,564,645 30,438,600
Diluted................................................. 31,883,620 30,956,415 33,681,372 30,438,600
</TABLE>
See notes to the condensed consolidated financial statements.
2
<PAGE>
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
-------- --------
<S> <C> <C>
Current assets
--------------
Cash and cash equivalents..................................................... $ 18.1 $ 70.9
Accounts receivable, less allowance for doubtful accounts
of $134.7 at September 30, 2000 and $156.7 at December 31, 1999............. 142.5 150.6
Inventories................................................................... 33.2 32.5
Deferred income taxes......................................................... 41.9 46.5
Other......................................................................... 136.3 52.9
-------- --------
Total current assets.......................................................... 372.0 353.4
Property and equipment, at cost:
Land.......................................................................... 68.5 63.4
Buildings..................................................................... 496.3 485.8
Equipment..................................................................... 642.1 626.5
Construction in progress...................................................... 61.0 44.8
-------- --------
1,267.9 1,220.5
Accumulated depreciation...................................................... (567.6) (520.8)
-------- --------
700.3 699.7
Intangible assets, net of accumulated amortization............................ 170.7 175.9
Investment in and advances to affiliates...................................... 80.0 103.0
Other......................................................................... 11.8 9.1
-------- --------
Total assets.................................................................. $1,334.8 $1,341.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Accounts payable.............................................................. $ 48.1 $ 57.7
Accrued salaries.............................................................. 25.5 32.1
Current portion of long-term debt............................................. 13.4 18.3
Other current liabilities..................................................... 43.4 57.7
-------- --------
Total current liabilities..................................................... 130.4 165.8
Long-term debt................................................................ 528.1 537.1
Deferred taxes and other liabilities.......................................... 44.2 31.3
Minority interests in equity of consolidated entities......................... 47.2 47.0
Stockholders' equity
--------------------
Common stock $.01 par value; 90,000,000 shares authorized; 34,645,540
shares outstanding at September 30, 2000................................... 0.3 0.3
Additional paid-in capital.................................................... 667.7 653.4
Unearned ESOP compensation and stockholder notes receivable................... (37.5) (40.1)
Accumulated deficit........................................................... (45.6) (53.7)
-------- --------
Total stockholders' equity.................................................... 584.9 559.9
-------- --------
Total liabilities and stockholders' equity.................................... $1,334.8 $1,341.1
======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE>
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the periods ended September 30, 2000 and 1999
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
For the nine
months ended
------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................................................ $ 8.1 $ (43.6)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for doubtful accounts................................................ 78.1 93.6
ESOP expense................................................................... 4.7 2.1
Minority interests............................................................. 6.3 7.0
Equity in (earnings) losses of affiliates...................................... 0.6 2.4
Depreciation and amortization.................................................. 62.1 78.7
Deferred income taxes.......................................................... 10.5 (15.3)
Impairment of long-lived assets................................................ 0.9 38.5
Gain on sale of assets......................................................... (4.6) (16.9)
Increase (decrease) in cash from operating assets and liabilities
Accounts receivable.......................................................... (72.4) (76.0)
Inventories and other assets................................................. (14.9) 11.4
Accounts payable and other current liabilities............................... (25.5) 49.7
Other........................................................................ 8.5 0.5
------- -------
Net cash provided by operating activities........................................ 62.4 132.1
Cash flows from investing activities
Purchases of property and equipment............................................ (57.2) (95.8)
Payments for acquisition....................................................... (70.1) --
Investment in and advances to affiliates....................................... 23.0 (62.7)
Proceeds received on sale of assets............................................ 4.4 70.8
Other.......................................................................... (1.8) 16.7
------- -------
Net cash used in investing activities............................................ (101.7) (71.0)
Cash flows from financing activities
Payments of long-term debt..................................................... (14.7) (87.6)
Proceeds from issuance of common stock......................................... 7.9 --
Distributions to minority partners............................................. (6.7) (17.5)
Decrease in intercompany balances with HCA, net................................ -- 106.2
------- -------
Net cash provided by (used in) financing activities............................. (13.5) 1.1
------- -------
Change in cash and cash equivalents.............................................. (52.8) 62.2
Cash and cash equivalents at beginning of period................................. 70.9 --
------- -------
Cash and cash equivalents at end of period....................................... $ 18.1 $ 62.2
======= =======
Interest payments................................................................ $ 39.0 $ 35.8
Income tax payments.............................................................. $ 0.7 $ --
</TABLE>
See notes to the condensed consolidated financial statements.
4
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements of Triad Hospitals, Inc. ("Triad"). In the opinion of
management, all adjustments consisting only of normal recurring adjustments
necessary for a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for the year. The
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 1999 included in Triad's Form 10-K.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements.
Certain prior amounts have been reclassified to conform to the current
presentation.
NOTE 2--SUBSEQUENT EVENTS
Triad announced on October 19, 2000 that it entered into an agreement to
acquire Quorum Health Group, Inc. ("Quorum") for approximately $2.4 billion in
cash, stock and assumption of debt. Under the terms of the agreement, Quorum
shareholders will receive $3.50 in cash and 0.4107 shares of Triad common stock
for each outstanding share of Quorum stock.
The transaction is subject to approval of each company's shareholders,
antitrust clearance and various other conditions generally customary for
transactions of this type. The transaction is also conditioned upon Triad's
receipt of a private letter ruling from the Internal Revenue Service that the
transaction will not alter the tax-free nature of the spin-off from HCA-The
Healthcare Company ("HCA") of Triad on May 11, 1999 (the "Spin-off") and is
further conditioned upon the receipt of necessary financing. Triad has received
a financing commitment of $1.7 billion from its investment banker to fund the
cash purchase price and to refinance certain existing debt of both companies.
Upon consummation of the transaction, Triad's board of directors will be
increased by two members of Quorum's current board. Triad expects that the
transaction will be completed in the first half of 2001.
On October 20, 2000, a class action lawsuit was filed against Triad and the
Board of Directors of Quorum in the Circuit Court of Davidson County, Tennessee,
on behalf of all public stockholders of Quorum. The complaint alleges that
Quorum's directors breached their fiduciary duties of loyalty and due care by
failing to implement reasonable procedures designed to maximize shareholder
value and to obtain the highest price reasonably available for Quorum's
shareholders. The complaint alleges that Triad aided and abetted Quorum's
directors' breach of their fiduciary duties. The complaint seeks an injunction
preventing consummation of the acquisition, or Quorum's business combination
with any third party, until Quorum adopts and implements a procedure or process,
such as an auction, to obtain the highest possible price for Quorum.
Alternatively, the complaint seeks compensatory damages in the event the
acquisition is consummated. The complaint also seeks an award of costs and
attorneys' fees. Triad believes the claims are without merit and will
vigorously defend the action.
NOTE 3--COMPANY OPERATIONS
As of January 1, 2000, Triad owned or operated 30 hospitals (including one
facility that is leased from others, two facilities that are leased to others
and an investment in two hospitals that are accounted for using the equity
method), 14 free-standing ambulatory surgery centers (including two investments
in ambulatory surgery centers that are accounted for using the equity method)
and related health care entities. Two of these hospitals were designated as held
for sale and Triad expects to complete the sales of these facilities by
December 31, 2000.
On February 11, 2000, Triad closed its acute care hospital in Roseburg,
Oregon, which was designated as held for sale. As of September 30, 2000, the
carrying value of this facility was $6.0 million. For the three months ended
5
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 3--COMPANY OPERATIONS (continued)
September 30, 2000 and 1999, this facility had net revenues of $0.3 million and
$5.2 million, respectively, and losses before impairment charges and income
taxes of $0.2 million and $0.5 million, respectively. For the nine months ended
September 30, 2000 and 1999, this facility had net revenues of $2.2 million and
$16.7 million, respectively, and losses before impairment charges and income
taxes of $4.0 million and $2.6 million, respectively.
Triad received loan repayments from one of its hospital joint ventures of
$37.0 million on February 28, 2000 and $3.7 million on April 11, 2000.
On March 31, 2000, Triad sold its limited partnership interest in a
rehabilitation hospital located in Tucson, Arizona for $4.0 million. A gain of
$4.2 million was recognized on the sale.
On June 1, 2000, Triad's partner in an ambulatory surgery center joint
venture in Arizona contributed the assets of an ambulatory surgery center to the
joint venture. Triad paid its partner $0.6 million for a majority interest in
these assets.
On June 23, 2000, Triad signed a definitive purchase agreement to acquire
hospitals in Denton, Texas and Lewisburg, West Virginia from NetCare Health
Systems, Inc. for a cash price of approximately $107.0 million plus
approximately $10.0 million in working capital. The definitive agreement also
included the acquisition of a hospital in Statesville, North Carolina, but Triad
has assigned the rights to acquire this hospital to a third party in a
simultaneous closing. On September 29, 2000, Triad completed the closing of the
Denton, Texas and Statesville, North Carolina hospitals. The effective date of
the Denton, Texas acquisition was October 1, 2000. Triad paid $69.0 million at
the closing as a partial payment on the acquisition of the Denton, Texas and
Lewisburg, West Virginia hospitals, which was recorded in other current assets.
On October 31, 2000, Triad paid $48.0 million as the final payment on the
acquisition and closed on the Lewisburg, West Virginia hospital.
On October 16, 2000, Triad announced that it will close its acute care
hospital in San Diego, California on November 30, 2000. As of September 30,
2000 the carrying value of this facility was $12.0 million. For the three
months ended September 30, 2000 and 1999, this facility had net revenue of $7.1
million and $6.1 million, respectively, and income (losses) before impairment
charges and income taxes of $0.1 million and $(0.4) million, respectively. For
the nine months ended September 30, 2000 and 1999, this facility had net revenue
of $21.1 million and $19.9 million, respectively, and income (losses) before
impairment charges and income taxes of $(0.7) million and $0.8 million,
respectively.
On October 25, 2000, Triad entered into a definitive agreement to sell its
hospital in Sherman, Texas, which was designated as held for sale, for $16.0
million. A nonrefundable deposit of $1.5 million was received at the signing of
the agreement. Triad expects that the sale will be completed by the end of
December 2000. The net book value of the facility was $12.4 million at
September 30, 2000, excluding $2.0 million of undeveloped land. For the three
months ended September 30, 2000 and 1999, this facility had net revenues of $7.4
million and $6.6 million, respectively, and income (losses) before impairment
charges and income taxes of $0.4 million and $(0.7) million, respectively. For
the nine months ended September 30, 2000 and 1999, this facility had net
revenues of $21.3 million and $21.5 million, respectively, and income (losses)
before impairment charges and income taxes of $1.1 million and $(1.5) million,
respectively.
NOTE 4--IMPAIRMENT OF LONG-LIVED ASSETS
During the quarter ended March 31, 2000, Triad entered into negotiations to
cancel one of its physician management contracts, which should be completed by
December 31, 2000. Accordingly, the carrying value of the long-lived assets
associated with this contract of approximately $1.0 million was reduced to fair
value, based on estimated disposal value, resulting in a non-cash charge of $0.9
million. For the three months ended September 30, 2000 and 1999, this entity
contributed revenues of $1.0 million and $0.7 million respectively, and losses
before impairment charges and income taxes of $0.7 million and $1.1 million,
respectively. For nine months ended September 30, 2000 and 1999, this entity
contributed revenues of $2.7 million and $2.7 million, respectively, and losses
before impairment charges and income taxes of $2.3 million and $3.2 million,
respectively.
6
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 4--IMPAIRMENT OF LONG-LIVED ASSETS (continued)
The carrying value of the long-lived assets related to two facilities
during the three months ended September 30, 1999 and five facilities during the
nine months ended September 30, 1999, all of which were sold during 1999, were
reduced to fair value, based on estimates of selling values, for a total non-
cash charge of $4.6 million and $35.4 million, respectively. The carrying value
of the facilities at the time of the impairments was approximately $12.5 million
and $63.1 million, respectively. These five facilities had net revenues of
approximately $21.6 million for the three months ended September 30, 1999 and
$80.0 million for the nine months ended September 30, 1999. These facilities
also contributed losses from continuing operations before income tax benefit and
the asset impairment charge of approximately $3.6 million for the three months
ended September 30, 1999 and $10.5 million for the nine months ended September
30, 1999.
During the quarter ended March 31, 1999, Triad recorded further impairment
losses of $3.1 million related to one hospital facility where the recorded asset
values were not deemed to be fully recoverable based upon the operating results,
trends and projected future cash flows. These assets are continuing to be used
and are now recorded at estimated fair value, based upon discounted, estimated
future cash flows.
The impairment charges for the nine months ended September 30, 2000 and
1999, totaling $0.9 million and $38.5 million, respectively, did not have a
significant impact on Triad's cash flows and are not expected to significantly
impact cash flows for future periods.
NOTE 5--LONG-TERM DEBT
On September 28, 2000, Triad's bank credit facility was amended to include
a new $200 million delayed draw term loan which can be drawn upon in up to ten
advances from the date of the amendment until one year after the amendment.
Principal payments on amounts outstanding at the end of the delay draw period
are due quarterly beginning February 2002 until May 2005. The delay drawn term
loan bears interest at LIBOR plus 3.0%. No advances were made as of September
30, 2000. The amendment also modifies the requirements under certain financial
ratios and tests and the restrictions on assets sales and capital expenditures.
In conjunction with the amendment, Triad paid $1.5 million in debt issue costs,
which will be amortized over the life of the loan. Triad made a draw on the
delay draw term loan of $24.0 million on October 31, 2000.
Triad Hospital Holdings Inc.'s senior subordinated notes were guaranteed by
all operating subsidiaries (the "Subsidiary Guarantors"). The guarantee
obligations of the Subsidiary Guarantors are full, unconditional and joint and
several. Triad does not wholly own certain Subsidiary Guarantors, although all
assets, liabilities, equity and earnings of these entities fully,
unconditionally and jointly and severally guarantee the senior subordinated
notes. The percentages of these entities owned by Triad range from 70% to 95%.
On June 26, 2000, Triad obtained a release of the guarantee of one of the non-
wholly owned Subsidiary Guarantors (the "Non-Guarantor Subsidiary"). Separate
financial statements of the non-wholly owned Subsidiary Guarantors have not been
presented because management has determined that they are inconsequential.
Condensed unaudited consolidating financial statements for Triad and its
subsidiaries including the financial statements of Triad Hospitals, Inc. (parent
only), Triad Hospitals Holdings, Inc., the combined Guarantor Subsidiaries and
the Non-Guarantor Subsidiary are as follows:
7
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the three months ended September 30, 2000
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
Triad Non-
Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
---------------- -------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ -- $ -- $ 288.6 $ 12.7 $ -- $ 301.3
Salaries and benefits.................... 0.3 -- 121.6 3.5 -- 125.4
Supplies................................. -- -- 41.5 3.2 -- 44.7
Other operating expenses................. -- -- 61.5 1.9 -- 63.4
Provision for doubtful accounts.......... -- -- 28.2 0.2 -- 28.4
Depreciation............................. -- -- 18.7 0.5 -- 19.2
Amortization............................. -- -- 1.6 0.1 -- 1.7
Interest expense allocated............... -- -- -- (0.1) 0.1 --
Interest expense, net.................... -- 15.7 (1.3) -- -- 14.4
ESOP expense............................. 2.0 -- -- -- -- 2.0
Management fees.......................... -- -- -- 0.1 (0.1) --
Gain on sale of assets................... -- -- (0.2) -- -- (0.2)
Impairment of long lived assets.......... -- -- -- -- -- --
---------------- -------------- ------------ ---------- ------------ ------------
Total operating expenses................. 2.3 15.7 271.6 9.4 -- 299.0
---------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before minority interest,
equity in earnings and income tax
provision............................. (2.3) (15.7) 17.0 3.3 -- 2.3
Minority interests....................... -- -- (1.9) -- -- (1.9)
Equity in earnings of affiliates......... 1.3 18.2 3.1 -- (22.8) (0.2)
---------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before income tax
provision............................. (1.0) 2.5 18.2 3.3 (22.8) 0.2
Income tax provision..................... -- (1.2) -- -- -- (1.2)
---------------- -------------- ------------ ---------- ------------ ------------
Net income (loss)........................ (1.0) $ 1.3 $ 18.2 $ 3.3 $ (22.8) $ (1.0)
================ ============== ============ ========== ============ ============
</TABLE>
8
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the three months ended September 30, 1999
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
Triad Non-
Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
---------------- -------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ -- $ -- $ 307.1 $ 12.0 $ 2.2 $ 321.3
Salaries and benefits.................... -- -- 131.6 3.2 -- 134.8
Supplies................................. -- -- 45.9 2.8 -- 48.7
Other operating expenses................. -- -- 70.7 1.5 -- 72.2
Provision for doubtful accounts.......... -- -- 25.7 0.3 -- 26.0
Depreciation............................. -- -- 22.6 0.5 -- 23.1
Amortization............................. -- -- 1.2 0.1 -- 1.3
Interest expense allocated............... -- -- (2.1) (0.3) 2.4 --
Interest expense, net.................... -- 19.2 (0.5) -- -- 18.7
ESOP expense............................. 1.6 -- -- -- -- 1.6
Management fees.......................... -- -- -- 0.2 (0.2) --
Gain on sale of assets................... -- -- (16.9) -- -- (16.9)
Impairment of long lived assets.......... -- -- 4.6 -- -- 4.6
---------------- -------------- ------------ ---------- ------------ ------------
Total operating expenses................. 1.6 19.2 282.8 8.3 2.2 314.1
---------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before minority interest,
equity in earnings and income tax
provision............................. (1.6) (19.2) 24.3 3.7 -- 7.2
Minority interests....................... -- -- (2.3) -- -- (2.3)
Equity in earnings of affiliates......... 3.4 24.8 2.8 -- (31.9) (0.9)
---------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before income tax
provision............................. 1.8 5.6 24.8 3.7 (31.9) 4.0
Income tax provision..................... -- (2.2) -- -- -- (2.2)
---------------- -------------- ------------ ---------- ------------ ------------
Net income (loss)........................ $ 1.8 $ 3.4 $ 24.8 $ 3.7 $ (31.9) $ 1.8
================ ============== ============ ========== ============ ============
</TABLE>
9
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2000
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
Triad Non-
Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
---------------- -------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ -- $ -- $ 876.8 $ 38.6 $ -- $ 915.4
Salaries and benefits.................... 0.6 -- 365.5 10.1 -- 376.2
Supplies................................. -- -- 127.5 9.4 -- 136.9
Other operating expenses................. -- -- 186.9 5.8 -- 192.7
Provision for doubtful accounts.......... -- -- 77.2 0.9 -- 78.1
Depreciation............................. -- -- 55.5 1.5 -- 57.0
Amortization............................. -- -- 4.8 0.3 -- 5.1
Interest expense allocated............... -- -- -- (0.2) 0.2 --
Interest expense, net.................... -- 46.6 (3.7) -- -- 42.9
ESOP expense............................. 4.7 -- -- -- -- 4.7
Management fees.......................... -- -- -- 0.2 (0.2) --
Gain on sale of assets................... -- -- (4.6) -- -- (4.6)
Impairment of long lived assets.......... -- -- 0.9 -- -- 0.9
---------------- -------------- ------------ ---------- ------------ ------------
Total operating expenses................. 5.3 46.6 810.0 28.0 -- 889.9
---------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before minority interests,
equity in earnings and income tax
provision............................. (5.3) (46.6) 66.8 10.6 -- 25.5
Minority interests....................... -- -- (6.3) -- -- (6.3)
Equity in earnings (loss) of affiliates.. 13.4 70.5 10.0 -- (94.5) (0.6)
---------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before income tax
provision............................. 8.1 23.9 70.5 10.6 (94.5) 18.6
Income tax provision..................... -- (10.5) -- -- -- (10.5)
---------------- -------------- ------------ ---------- ------------ ------------
Net income (loss)........................ $ 8.1 $ 13.4 $ 70.5 $ 10.6 $ (94.5) $ 8.1
================ ============== ============ ========== ============ ============
</TABLE>
10
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 1999
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
Triad Non-
Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
---------------- -------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ -- $ -- $ 990.7 $ 36.8 $ 1.5 $ 1,029.0
Salaries and benefits.................... -- -- 428.6 9.7 -- 438.3
Supplies................................. -- -- 142.8 8.5 -- 151.3
Other operating expenses................. -- -- 227.9 5.3 -- 233.2
Provision for doubtful accounts.......... -- -- 92.9 0.7 -- 93.6
Depreciation............................. -- -- 70.7 1.7 -- 72.4
Amortization............................. -- -- 5.9 0.4 -- 6.3
Interest expense allocated............... -- -- 22.5 (1.7) 1.7 22.5
Interest expense net..................... -- 28.3 -- -- -- 28.3
ESOP expense............................. 2.1 -- -- -- -- 2.1
Management fees.......................... -- -- 8.8 0.3 (0.2) 8.9
Gain on sale of assets................... -- -- (16.9) -- -- (16.9)
Impairment of long lived assets.......... -- -- 35.4 3.1 -- 38.5
---------------- -------------- ------------ ---------- ------------ ------------
Total operating expenses................. 2.1 28.3 1,018.6 28.0 1.5 1,078.5
---------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before minority interests,
equity in earnings and income tax
benefit............................... (2.1) (28.3) (27.9) 8.8 -- (49.5)
Minority interests....................... -- -- (7.0) -- -- (7.0)
Equity in earnings (loss) of affiliates.. (5.6) 7.4 6.4 -- (10.6) (2.4)
---------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before income tax
benefit................................ (7.7) (20.9) (28.5) 8.8 (10.6) (58.9)
Income tax benefit....................... -- 15.3 -- -- -- 15.3
---------------- -------------- ------------ ---------- ------------ ------------
Net income (loss)........................ $ (7.7) $ (5.6) $ (28.5) $ 8.8 $ (10.6) $ (43.6)
================ ============== ============ ========== ============ ============
</TABLE>
Condensed Consolidating Balance Sheets
September 30, 2000
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
Triad Non-
Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
---------------- -------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents............. $ -- $ -- $ 17.9 $ 0.2 $ -- $ 18.1
Accounts receivable, net.............. -- -- 135.2 7.3 -- 142.5
Other current assets.................. -- 41.9 168.1 1.4 -- 211.4
---------------- -------------- ------------ ---------- ------------ ------------
Total current assets..................... -- 41.9 321.2 8.9 -- 372.0
Net property and equipment, at cost...... -- -- 693.4 6.9 -- 700.3
Investments in subsidiaries.............. 576.1 1,309.2 130.3 -- (1,935.6) 80.0
Due from affiliates...................... 8.7 -- 158.5 27.9 (195.1) --
Other assets............................. -- 4.9 167.2 10.4 -- 182.5
---------------- -------------- ------------ ---------- ------------ ------------
Total assets............................. $ 584.8 $ 1,356.0 $ 1,470.6 $ 54.1 $ (2,130.7) $ 1,334.8
================ ============== ============ ========== ============ ============
Liabilities and Equity
Current liabilities...................... $ -- $ 26.3 $ 101.1 $ 3.0 $ -- $ 130.4
Due to affiliates........................ -- 195.1 -- -- (195.1) --
Long-term debt........................... -- 522.6 5.5 -- -- 528.1
Deferred taxes and other liabilities..... -- 35.9 7.4 0.9 -- 44.2
Minority interests in equity of
consolidated entities................. -- -- 47.2 -- -- 47.2
Equity................................... 584.8 576.1 1,309.4 50.2 (1,935.6) 584.9
---------------- -------------- ------------ ---------- ------------ ------------
Total liabilities and equity............. $ 584.8 $ 1,356.0 $ 1,470.6 $ 54.1 $ (2,130.7) $ 1,334.8
================ ============== ============ ========== ============ ============
</TABLE>
11
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Balance Sheets
December 31, 1999
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
Triad Non-
Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
---------------- -------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents............ $ -- $ -- $ 70.8 $ 0.1 $ -- $ 70.9
Accounts receivable, net............. -- -- 144.3 6.3 -- 150.6
Other current assets................. -- 46.3 84.3 1.3 -- 131.9
---------------- -------------- ------------ ---------- ------------ ------------
Total current assets..................... -- 46.3 299.4 7.7 -- 353.4
Net property and equipment, at cost...... -- -- 692.3 7.4 -- 699.7
Investments in subsidiaries.............. 559.1 1,236.0 152.7 -- (1,844.8) 103.0
Due from affiliates...................... 0.8 -- 115.0 27.0 (142.8) --
Other assets............................. -- 4.1 170.2 10.7 -- 185.0
---------------- -------------- ------------ ---------- ------------ ------------
Total assets............................. $ 559.9 $ 1,286.4 $ 1,429.6 $ 52.8 $ (1,987.6) $ 1,341.1
================ ============== ============ ========== ============ ============
Liabilities and Equity
Current liabilities...................... $ -- $ 23.0 $ 140.4 $ 2.4 $ -- $ 165.8
Due to affiliates........................ -- 142.8 -- -- (142.8) --
Long-term debt........................... -- 530.9 6.2 -- -- 537.1
Deferred taxes and other liabilities..... -- 30.6 -- 0.7 -- 31.3
Minority interests in equity of
consolidated entities................ -- -- 47.0 -- -- 47.0
Equity................................... 559.9 559.1 1,236.0 49.7 (1,844.8) 559.9
---------------- -------------- ------------ ---------- ------------ ------------
Total liabilities and equity............. $ 559.9 $ 1,286.4 $ 1,429.6 $ 52.8 $ (1,987.6) $ 1,341.1
================ ============== ============ ========== ============ ============
</TABLE>
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2000
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
Triad Non-
Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
---------------- -------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities............................ $ -- $ (38.3) $ 88.6 $ 12.1 $ -- $ 62.4
Cash flows from investing activities
Purchases of property and equipment.. -- -- (55.9) (1.3) -- (57.2)
Payments for acquisitions............ -- -- (70.1) -- -- (70.1)
Investment in and advances to
affiliates........................ -- -- 33.2 (10.2) -- 23.0
Proceeds received on sale of assets.. -- -- 4.4 -- -- 4.4
Other................................ -- -- (2.2) 0.4 -- (1.8)
---------------- -------------- ------------ ---------- ------------ ------------
Net cash used in investing activities.... -- -- (90.6) (11.1) -- (101.7)
Cash flows from financing activities
Payments of long-term debt........... -- (14.0) (0.7) -- -- (14.7)
Proceeds from issuance of common
stock............................. 7.9 -- -- -- -- 7.9
Distributions to minority partners... -- -- (6.7) -- -- (6.7)
Net change in due to (from) affiliate (7.9) 52.3 (43.5) (0.9) -- --
---------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in) financing
activities........................... -- 38.3 (50.9) (0.9) -- (13.5)
---------------- -------------- ------------ ---------- ------------ ------------
Change in cash and cash equivalents...... -- -- (52.9) 0.1 -- (52.8)
Cash and cash equivalents at beginning
of period............................ -- -- 70.8 0.1 -- 70.9
---------------- -------------- ------------ ---------- ------------ ------------
Cash and cash equivalents at end of
period............................... $ -- $ -- $ 17.9 $ 0.2 $ -- $ 18.1
================ ============== ============ ========== ============ ============
</TABLE>
12
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 1999
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
Triad Non-
Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
---------------- -------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.............................. $ -- $ (10.5) $ 127.4 $ 15.2 $ -- $ 132.1
Cash flows from investing activities
Purchases of property and equipment..... -- -- (92.9) (2.9) -- (95.8)
Investment in and advances to
affiliates............................. 0.8 -- (49.5) (14.0) -- (62.7)
Proceeds received on sale of assets..... -- -- 70.8 -- -- 70.8
Other................................... -- -- 16.9 (0.2) -- 16.7
---------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in) investing
activities.............................. 0.8 -- (54.7) (17.1) -- (71.0)
Cash flows from financing activities
Payments of long-term debt............. -- (80.5) (7.1) -- -- (87.6)
Distributions to minority partners..... -- -- (17.5) -- -- (17.5)
Net change in due to (from) affiliate.. (0.8) 91.0 13.9 2.1 -- 106.2
---------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in) financing
activities............................. (0.8) 10.5 (10.7) 2.1 -- 1.1
---------------- -------------- ------------ ---------- ------------ ------------
Change in cash and cash equivalents....... -- -- 62.0 0.2 -- 62.2
Cash and cash equivalents at beginning
of period............................. -- -- -- -- -- --
---------------- -------------- ------------ ---------- ------------ ------------
Cash and cash equivalents at end of
period................................ $ -- $ -- $ 62.0 $ 0.2 $ -- $ 62.2
================ ============== ============ ========== ============ ============
</TABLE>
NOTE 6--STOCK BENEFIT PLANS
On February 18, 2000, Triad granted 1,009,000 stock options under the 1999
Long-Term Incentive Plan with an exercise price equal to the market price on the
date of the grant. On April 28, 2000, Triad granted 900,056 stock options under
the 1999 Long-Term Incentive Plan with an exercise price of $17.07, which was
the market price of the common stock on the effective date of grant, contingent
on shareholder approval of an amendment to the 1999 Long-Term Incentive Plan
increasing the numbers of shares available to 6,500,000. Shareholder approval
was granted on May 23, 2000. Compensation expense of $0.3 million and $0.6
million were recognized in the three and nine months ended September 30, 2000
based on the difference between market price of the common stock on the date of
shareholder approval and the market price of the common stock on date of grant.
On September 8, 2000, 117,500 stock options were granted under the 1999 Long-
Term Incentive Plan with an exercise price equal to the market price at the date
of the grant. All options granted are exercisable over a four-year period and
expire 10 years from the date of the grant.
Triad granted 76,000 stock options under various other plans on May 23,
2000. These options have an exercise price equal to the market price at the
date of the grant and are exercisable over a four year period and expire 10
years from the date of grant.
During the nine months ended September 30, 2000, 85,561 shares of common
stock were issued through the Employee Stock Purchase Plan and 72,586 shares of
common stock were issued pursuant to the Management Stock Purchase Plan.
Proceeds from the issuance of these shares was $1.7 million. During the nine
months ended September 30, 2000, 544,111 stock options were exercised for
proceeds of $6.2 million.
Triad entered into a stock option pledge agreement with a charitable
corporation granting 100,000 stock options on July 11, 2000 subject to approval
by the Internal Revenue Service (the "IRS"). The exercise price of these stock
options are equal to the market price on the grant date. The stock options are
immediately vested upon receipt of the IRS approval and expire 10 years from
that date. Compensation expense will be recorded under Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation" using the
fair value of these options at the time IRS approval is received.
13
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 7--INCOME (LOSS) PER SHARE
Income (loss) per common share is based on the weighted average number of
shares outstanding adjusted for the shares issued to Triad's Employee Stock
Ownership Plan ("ESOP"). The weighted average number of shares outstanding for
the three and nine months ended September 30, 1999 assumes the shares issued at
the Spin-off were outstanding at the beginning of 1999. Diluted weighted average
shares outstanding is calculated by adjusting basic weighted average shares
outstanding by all potentially dilutive stock options. Stock options
outstanding of 5,794,358 at September 30, 2000 were not included for diluted
loss per share calculations for the three months ended September 30, 2000 since
the impact was antidilutive. Stock options outstanding of 4,609,991 as of
September 30, 1999 were not included for diluted loss per share calculations
since the impact was antidilutive. Weighted average shares for the three and
nine months ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares exclusive of unreleased ESOP shares....... 31,696,120 30,870,701 31,452,145 30,352,886
ESOP shares committed to be released.............................. 187,500 85,714 112,500 85,714
---------- ---------- ---------- ----------
Basic weighted average shares outstanding......................... 31,883,620 30,956,415 31,564,645 30,438,600
Effect of dilutive securities - employee stock options............ -- -- 2,116,727 --
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding....................... 31,883,620 30,956,415 33,681,372 30,438,600
========== ========== ========== ==========
</TABLE>
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION
The distribution of Triad's revenues and EBITDA (which is used by
management for operating performance review, see (a)) is summarized in the
following table (dollars in millions):
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
East Division................................................ $ 117.0 $ 110.9 $ 365.1 $ 326.2
West Division................................................ 71.7 66.5 216.3 205.9
Central Division............................................. 87.6 73.7 259.7 226.2
Ambulatory Surgery Centers................................... 12.7 12.0 38.6 36.8
Sold and Held for Sale....................................... 7.1 54.4 25.0 223.9
Corporate and other.......................................... 5.2 3.8 10.7 10.0
------- -------- ------- ---------
$ 301.3 $ 321.3 $ 915.4 $ 1,029.0
======= ======== ======= =========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EBITDA (a):
East Division................................................ $ 15.9 $ 17.8 $ 62.6 $ 56.0
West Division................................................ 9.5 8.4 25.6 30.2
Central Division............................................. 9.6 7.3 37.6 20.1
Ambulatory Surgery Centers................................... 3.5 4.2 11.8 12.1
Sold and Held for Sale....................................... (0.3) (2.2) (0.5) 3.6
Corporate and other.......................................... 1.0 3.2 (6.2) (11.8)
------- -------- ------- ---------
$ 39.2 $ 38.7 $ 130.9 $ 110.2
======= ======== ======= =========
</TABLE>
(a) EBITDA is defined as net income (loss) before depreciation, amortization,
interest expense, interest income, ESOP expense, gain on sale of assets,
management fees, impairment of long-lived assets, minority interest in
earnings of consolidated entities, and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves as
a measure of leverage capacity and debt service
14
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 8--SEGMENT AND GEOGRAPHIC INFORMATION (continued)
ability. EBITDA should not be considered as a measure of financial performance
under generally accepted accounting principles, and the items excluded from
EBITDA should not be considered in isolation or as an alternative to net
income (loss), cash flows generated by operating, investing or financing
activities or other financial statement data presented in the condensed
consolidated financial statements as an indicator of financial performance or
liquidity. Because EBITDA is not a measurement determined in accordance with
generally accepted accounting principles and is thus susceptible to varying
calculations, EBITDA as presented may not be comparable to other similarly
titled measures of other companies.
NOTE 9--CONTINGENCIES
HCA Investigations
HCA is currently the subject of several federal investigations into certain
of its business practices, as well as governmental investigations by various
states. Management understands that HCA is cooperating in these investigations
and that HCA believes through written notice and other means, that it is a
target in these investigations. Given the breadth of the ongoing investigations,
management understands that HCA expects additional subpoenas and other
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future. HCA is a defendant in several qui tam actions
brought by private parties on behalf of the United States of America, which have
been unsealed and served on HCA. The actions allege, in general, that HCA and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act for improper claims submitted to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the federal
government, civil penalties of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. To Triad's
knowledge, the government has intervened in at least seven qui tam actions
against HCA. HCA is aware of additional qui tam actions that remain under seal
and believes that there are other sealed qui tam cases of which it is unaware.
On May 5, 2000, Triad was advised that one of such qui tam actions which had
recently been partially unsealed, United States of America (ex.rel.Lanni) v.
Curative Health Services. et. al. (98 Civ. 2501, S.D.N.Y., August 24, 1999),
listed three of its hospitals as among the various named defendants. This qui
tam action alleges various violations arising out of relationships between
Curative Health Services and the other defendants. Two of the three Triad
hospitals included as defendants ended their relationship with Curative Health
Services prior to the Spin-off, while the third hospital maintains an ongoing
relationship with Curative.
On May 18, 2000, HCA announced that it had reached an understanding with
the Civil Division of the United States Department of Justice to recommend to
settle, subject to certain conditions, the civil claims against HCA relating to
diagnosis related group coding, outpatient laboratory billing and home health
issues. The understanding with the Department of Justice would require HCA to
pay $745 million in compensation to the government, with interest at a fixed
rate of 6.5% per annum and would reduce HCA's existing letter of credit
agreement with the government from $1 billion to $250 million at the time of the
payment of the settlement. It remains too early to predict the effect of the
outcome of any of the ongoing investigations or qui tam and other actions, or
whether any additional investigations or litigations will be commenced. If HCA
is found to have violated federal or state laws relating to Medicare, Medicaid
or similar programs, HCA could be subject to substantial monetary fines, civil
and criminal penalties, and exclusion from participation in the Medicare and
Medicaid programs. Similarly, the amounts claimed in the qui tam and other
actions may be substantial, and HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions.
HCA is a defendant in a number of other suits, which allege, in general,
improper and fraudulent billing, overcharging, coding and physician referrals
(including the investigations not covered by the understanding), as well as
other violations of law. Certain of the suits have been conditionally certified
as class actions.
In connection with the Spin-off, HCA has agreed to indemnify Triad in
respect of any losses which it may incur as a result of the proceedings
described above, and Triad would not be required to contribute any part of HCA's
payment pursuant to the settlement understanding. If any of such indemnified
matters were successfully asserted against Triad, or any of its facilities, and
HCA failed to meet its indemnification obligations then such losses could have a
material adverse effect on the business, financial position, results of
operations or prospects of Triad. HCA will not indemnify Triad for losses
relating to any acts, practices and omissions engaged in by Triad
15
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 9--CONTINGENCIES (continued)
after the date of the Spin-off, whether or not Triad is indemnified for similar
acts, practices and omissions occurring prior to the date of the Spin-off.
HCA has also agreed to indemnify Triad in respect of any losses which it may
incur as a result of proceedings which may be commenced by government
authorities or by private parties in the future that arise from acts, practices
or omissions engaged in prior to the Spin-off and related to the proceedings
described above. HCA has also agreed that, in the event that any hospital owned
by Triad is permanently excluded from participation in the Medicare and Medicaid
programs as a result of the proceedings described above, then HCA will make a
cash payment to Triad in an amount, if positive, equal to five times the
excluded hospital's 1998 income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-lived
assets, minority interests and income taxes, as set forth on a schedule to the
distribution agreement, less the net proceeds of the sale or other disposition
of the excluded hospital. Triad has agreed that, in connection with the pending
governmental investigations described above, it will participate with HCA in
negotiating one or more compliance agreements setting forth each of their
agreements to comply with applicable laws and regulations (and one of the
conditions to the settlement understanding is the execution by HCA and the
federal government of a corporate integrity agreement). If any of such
indemnified matters were successfully asserted against Triad, or any of its
facilities, and HCA failed to meet its indemnification obligations, then such
losses could have a material adverse effect on the business, financial position,
results of operations or prospects of Triad. HCA will not indemnify Triad for
losses relating to any acts, practices and omissions engaged in by Triad after
the Spin-off, whether or not Triad is indemnified for similar acts, practices
and omissions occurring prior to the Spin-off.
General Liability Claims
Triad is, from time to time, subject to claims and suits arising in the
ordinary course of business, including claims for damages for personal injuries,
breaches of contract or for wrongful restriction of, or interference with,
physician's staff privileges. In certain of these actions, claimants have asked
for punitive or other damages against Triad that may not be covered by
insurance. Triad is currently not a party to any such proceeding which, in
management's opinion, would have a material adverse effect on Triad's business,
financial condition or results of operations.
It is management's opinion that the ultimate resolution of these pending
claims and legal proceedings will not have a material adverse effect on Triad's
results of operations, financial position or cash flows.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which was required to be adopted in years
beginning after June 15, 1999. In May 1999, the effective date of SFAS 133 was
deferred until years beginning after June 15, 2000. Because of Triad's minimal
use of derivatives, management does not anticipate that the adoption of the new
statement will have a significant effect on the results of operations or the
financial position of Triad.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"), which was required to be adopted in the first quarter of years beginning
after December 15, 1999. In June 2000, the effective date of SAB 101 was
delayed until the fourth quarter of 2000 for years beginning after December 15,
1999. Management does not anticipate that the application of SAB 101 will have
a significant effect on the results of operations or the financial position of
Triad.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation-an interpretation of APB Opinion No.
25" ("FIN 44"), which became effective on July 1, 2000 covering transactions
occurring after December 15, 1998. FIN 44 clarifies the application of APB
Opinion No. 25 relating to the definition of an employee, criteria for
determining whether a plan qualifies as a noncompensatory plan, accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of
16
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS (continued)
stock compensation awards in a business combination. Management does not
anticipate that the application of FIN 44 will have a significant effect on the
results of operations or the financial position of Triad.
17
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Triad owns and operates the health care service business which comprised
the Pacific Group of HCA until the Spin-off. The Spin-off, which occurred on May
11, 1999, marked the beginning of Triad's operations as an independent, publicly
traded company.
During 1999, Triad sold ten hospitals and two ambulatory surgery centers
and opened one new hospital, which is accounted for using the equity method. On
February 11, 2000, Triad ceased operations of one hospital and, on March 31,
2000, sold its partnership interest in a rehabilitation hospital. On June 1,
2000, Triad purchased a majority interest in the assets of an ambulatory surgery
center.
The Spin-off, the sales of ten facilities and its partnership interest,
cessation of operations of one facility and the opening of one joint venture
facility significantly affects the comparability of the results of operations
for the three and nine months ended September 30, 2000 to the three and nine
months ended September 30, 1999.
On October 16, 2000, Triad announced that it will close its acute care
hospital in San Diego, California on November 30, 2000. As of September 30,
2000 the carrying value of this facility was $12.0 million. Triad anticipates
an impairment charge of $5.0 to $7.0 million will be recorded in the fourth
quarter of 2000 due to the closure of this facility. For the three months ended
September 30, 2000 and 1999, this facility had net revenue of $7.1 million and
$6.1 million, respectively, and income (losses) before impairment charges and
income taxes of $0.1 million and $(0.4) million (including $0.3 million of
depreciation in both periods), respectively. For the nine months ended
September 30, 2000 and 1999, this facility had net revenue of $21.1 million and
$19.9 million, respectively, and income (losses) before impairment charges and
income taxes of $(0.7) million and $0.8 million (including $0.9 million and $0.8
million of depreciation), respectively.
On October 25, 2000, Triad entered into a definitive agreement to sell its
hospital in Sherman, Texas, which was designated as held for sale, for $16.0
million. A nonrefundable deposit of $1.5 million was received at the signing of
the agreement. Triad expects that the sale will be completed by the end of
December 2000. The net book value of the facility was $12.4 million at
September 30, 2000, excluding $2.0 million of undeveloped land. For the three
months ended September 30, 2000 and 1999, this facility had net revenues of $7.4
million and $6.6 million, respectively, and income (losses) before impairment
charges and income taxes of $0.4 million and $(0.7) million (including $0.7
million of depreciation in 1999), respectively. For the nine months ended
September 30, 2000 and 1999, this facility had net revenues of $21.3 million and
$21.5 million, respectively, and income (losses) before impairment charges and
income taxes of $1.1 million and $(1.5) million (including $2.2 million of
depreciation in 1999), respectively.
Information regarding HCA included in this Report on Form 10-Q is derived
from reports and other information filed by HCA with the Securities and Exchange
Commission.
FORWARD LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains disclosures which are "forward-looking
statements." Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be identified by the use
of words such as "may", "believe", "will", "expect", "project", "estimate",
"anticipate", "plan" or "continue". These forward-looking statements are based
on the current plans and expectations of Triad and are subject to a number of
uncertainties and risks that could significantly affect current plans and
expectations and the future financial condition and results of Triad. These
factors include, but are not limited to, (i) the highly competitive nature of
the health care business, (ii) the efforts of insurers, employers and others to
contain health care costs, (iii) possible changes in the Medicare and Medicaid
programs that may further limit reimbursements to health care providers and
insurers, (iv) changes in Federal, state or local regulations affecting the
health care industry, (v) the possible enactment of Federal or state health care
reform, (vi) the ability to attract and retain qualified management and
personnel, including physicians, (vii) claims and legal actions relating to
professional liabilities and other matters, (viii) fluctuations in the market
value of Triad's common stock, (ix) the departure of key executive officers from
Triad, (x) changes in accounting practices, (xi) changes in general economic
conditions, (xii) future divestitures which may result in additional charges,
(xiii) the ability to enter into managed care provider arrangements on
acceptable terms, (xiv) the availability and terms of capital to fund the
expansion of Triad's business, (xv) changes in business strategy or development
plans, (xvi) timeliness of reimbursement payments received under government
programs and (xvii) other
18
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Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
risk factors. As a consequence, current plans, anticipated actions and future
financial condition and results may differ from those expressed in any forward-
looking statements made by or on behalf of Triad. Investors are cautioned not to
unduly rely on such forward-looking statements when evaluating the information
presented in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RESULTS OF OPERATIONS
Revenue/Volume Trends
Triad's revenues continue to be affected by an increasing proportion of
revenue being derived from fixed payment, higher discount sources, including
Medicare, Medicaid and managed care plans. In addition, insurance companies,
government programs (other than Medicare) and employers purchasing health care
services for their employees are also negotiating discounted amounts that they
will pay health care providers rather than paying standard prices. Triad expects
patient volumes from Medicare and Medicaid to continue to increase due to the
general aging of the population and expansion of state Medicaid programs.
However, under the Federal Balanced Budget Act of 1997 (the "Balanced Budget
Act"), Triad's reimbursement from Medicare and Medicaid programs was reduced in
2000 and 1999 and will be further reduced with the phasing in of reductions in
reimbursement levels. Certain of the reductions from the Balanced Budget Act
will be mitigated by the Balanced Budget Refinement Act of 1999. The Balanced
Budget Act has accelerated a shift, by certain Medicare beneficiaries, from
traditional Medicare coverage to medical coverage that is provided under managed
care plans. Triad generally receives lower payments per patient under managed
care plans than under traditional indemnity insurance plans. With an increasing
proportion of services being reimbursed based upon fixed payment amounts (where
the payment is based upon the diagnosis, regardless of the cost incurred or
level of service provided), revenues, earnings and cash flows are being reduced.
As part of the Balanced Budget Act, the Health Care Financing Administration
implemented a prospective payment system for outpatient hospital services
("Outpatient PPS") on August 1, 2000. The implementation of Outpatient PPS
reduced reimbursement by approximately $0.2 million in the three months ended
September 30, 2000 and Triad estimates that reimbursement will be reduced by
$1.5 million annually. Patient revenues related to Medicare and Medicaid
patients were 36.5% and 36.9% of total patient revenues for the three months
ended September 30, 2000 and 1999, respectively, and 37.0% and 39.8% of total
patient revenues for the nine months ended September 30, 2000 and 1999,
respectively. Patient revenues related to managed care plan patients were 34.6%
and 33.1% of total patient revenues for the three months ended September 30,
2000 and 1999, respectively, and 31.9% and 32.2% of total patient revenues for
the nine months ended September 30, 2000 and 1999, respectively. Patient
revenues from capitation arrangements (prepaid health service agreements) are
less than 1% of net patient revenues.
As discussed previously, Triad sold ten hospitals during 1999 and ceased
operations of one hospital on February 11, 2000. These hospitals had revenues of
$46.7 million for the three months ended September 30, 1999, and losses before
gain on sales of assets, impairment charges and income taxes of $4.4 million.
These hospitals had revenues of $186.0 million for the nine months ended
September 30, 1999 and losses before gain on sales of assets, impairment charges
and income taxes of $39.9 million.
Triad's revenues also continue to be affected by the trend toward certain
services being performed more frequently on an outpatient basis. Growth in
outpatient services is expected to continue in the health care industry as
procedures performed on an inpatient basis are converted to outpatient
procedures through continuing advances in pharmaceutical and medical
technologies. The redirection of certain procedures to an outpatient basis is
also influenced by pressures from payers to perform certain procedures as
outpatient care rather than inpatient care. Outpatient revenues were 43.6% and
45.9% of patient revenues for the three months ended September 30, 2000 and
1999, respectively, and 45.0% and 45.3% for the nine months ended September 30,
2000 and 1999, respectively.
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
increasing percentages of patient volume being related to patients participating
in managed care plans and continuing trends toward more services being performed
on an outpatient basis are expected to present ongoing challenges. The
challenges presented by these trends are magnified by Triad's inability to
control these trends and the associated risks. To maintain and improve its
operating margins in future periods, Triad must increase patient volumes while
controlling the costs of providing services. If Triad is not able to achieve
reductions in the cost of providing services through increased operational
efficiencies, and the trend toward declining reimbursements and payments
continues, results of operations and cash flows will deteriorate.
19
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management believes that the proper response to these challenges includes
the delivery of a broad range of quality health care services to physicians and
patients with operating decisions being primarily made by the local management
teams and local physicians.
In connection with the Spin-off, HCA agreed to indemnify Triad for any
payments which it is required to make in respect of Medicare, Medicaid and Blue
Cross cost reports relating to periods ending on or prior to the date of the
Spin-off, and Triad agreed to indemnify HCA for and pay to HCA any payments
received by it relating to such cost reports. Triad is responsible for the
filing of these cost reports and any terminating cost reports. Triad has
recorded a receivable from HCA relating to the indemnification of $30.0 million
as of September 30, 2000.
Operating Results Summary
The following is a summary of operating results for the three and nine months
ended September 30, 2000 and 1999 (dollars in millions, except per share amounts
and ratios):
20
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- -------------------------
2000 1999 2000 1999
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................................ $ 301.3 100.0 $321.3 100.0 $ 915.4 100.0 $1,029.0 100.0
Salaries and benefits........................... 125.4 41.6 134.8 42.0 376.2 41.1 438.3 42.6
Supplies........................................ 44.7 14.8 48.7 15.2 136.9 14.9 151.3 14.7
Other operating expenses........................ 63.4 21.1 72.2 22.5 192.7 21.1 233.2 22.7
Provision for doubtful accounts................. 28.4 9.4 26.0 8.1 78.1 8.5 93.6 9.1
Depreciation and amortization................... 20.9 6.9 24.4 7.6 62.1 6.8 78.7 7.6
Interest expense allocated from HCA............. -- -- -- -- -- -- 22.5 2.2
Interest expense, net........................... 14.4 4.8 18.7 5.8 42.9 4.7 28.3 2.7
ESOP expense.................................... 2.0 0.7 1.6 0.5 4.7 0.5 2.1 0.2
Management fees allocated from HCA.............. -- -- -- -- -- -- 8.9 0.9
Gain on sale of assets.......................... (0.2) (0.1) (16.9) (5.3) (4.6) (0.5) (16.9) (1.6)
Impairment of long-lived assets................. -- -- 4.6 1.4 0.9 0.1 38.5 3.7
-------- ----- ------ ----- -------- ----- -------- -----
299.0 99.2 314.1 97.8 889.9 97.2 1,078.5 104.8
-------- ----- ------ ----- -------- ----- -------- -----
Income (loss) before minority interests, equity
in earnings and income tax (provision) benefit. 2.3 0.8 7.2 2.2 25.5 2.8 (49.5) (4.8)
Minority interests in earnings of consolidated
entities....................................... (1.9) (0.6) (2.3) (0.7) (6.3) (0.7) (7.0) (0.7)
Equity in earnings (loss) of affiliates......... (0.2) (0.1) (0.9) (0.3) (0.6) (0.1) (2.4) (0.2)
-------- ----- ------ ----- -------- ----- -------- -----
Income (loss) before income tax (provision)
benefit........................................ 0.2 0.1 4.0 1.2 18.6 2.0 (58.9) (5.7)
Income tax (provision) benefit.................. (1.2) (0.4) (2.2) (0.7) (10.5) (1.1) 15.3 1.5
-------- ----- ------ ----- -------- ----- -------- -----
Net income (loss)............................... $ (1.0) (0.3) $ 1.8 0.5 $ 8.1 0.9 $ (43.6) (4.2)
======== ===== ====== ===== ======== ===== ======== =====
Income (loss) per common share
Basic......................................... $ (0.03) 0.06 $ 0.26 $ (1.43)
Diluted....................................... $ (0.03) 0.06 $ 0.24 $ (1.43)
EBITDA (a)...................................... $ 39.2 38.7 $ 130.9 $ 110.2
Number of hospitals at end of period (b)
Owned and managed............................. 25 29 25 29
Joint ventures................................ 2 2 2 2
Leased to others.............................. 2 2 2 2
-------- ------ -------- --------
Total......................................... 29 33 29 33
Ongoing operations: (c)
Licensed beds at end of period (d).............. 3,596 3,604 3,596 3,604
Available beds at end of period (e)............. 3,158 3,176 3,158 3,176
Admissions (f)
Owned and managed............................. 30,924 28,812 95,253 91,435
Joint ventures................................ 2,917 2,148 8,322 5,431
-------- ------ ------- --------
Total......................................... 33,841 30,960 103,575 96,866
Adjusted admissions (g)......................... 54,199 50,170 164,057 155,215
Outpatient visits............................... 322,466 306,700 959,522 927,325
Surgeries....................................... 51,445 49,091 155,920 145,346
Average length of stay (h)...................... 4.3 4.4 4.4 4.5
Outpatient revenue percentage................... 43.6% 45.9% 45.0% 45.3%
Inpatient revenue per admission................. $ 5,333 $ 4,992 $ 5,082 $ 4,887
Outpatient revenue per outpatient visit......... $ 395 $ 398 $ 414 $ 399
Patient revenue per adjusted admission.......... $ 5,395 $ 5,302 $ 5,369 $ 5,263
</TABLE>
(a) EBITDA is defined as net income (loss) before depreciation and
amortization, interest expense, ESOP expense, gain on sale of assets,
management fees, impairment of long-lived assets, minority interests in
earnings of consolidated entities, and income taxes. EBITDA is commonly
used as an analytical indicator within the health care industry, and also
serves as a measure of leverage capacity and debt service ability. EBITDA
should not be considered as a measure of financial performance under
generally accepted accounting principles, and the items excluded from
EBITDA are significant components in understanding and assessing financial
performance. EBITDA should not be considered in isolation or as an
alternative to net income (loss), cash flows generated by operating,
investing or financing activities or other financial statement data
presented in the condensed consolidated financial statements as an
indicator of financial performance or liquidity. Because EBITDA is not a
measurement determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations, EBITDA as
presented may not be comparable to other similarly titled measures of other
companies.
21
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(b) This table does not include any operating statistics, except for
admissions, for the joint ventures and facilities leased to others.
(c) Ongoing operations exclude facilities that were sold or closed.
(d) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(e) Available beds are those beds a facility actually has in use.
(f) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's facilities and is used by
management and certain investors as a general measure of inpatient volume.
(g) Adjusted admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(h) Represents the average number of days an admitted patient stays in Triad's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
Three months ended September 30, 2000 and 1999
Income before income taxes decreased to $0.2 million in the three months
ended September 30, 2000 from income of $4.0 million in the three months ended
September 30, 1999. The decrease was attributable to $16.9 million gain on sale
of five facilities during the three months ended September 30, 1999 and an
increase in depreciation at the facilities that comprise ongoing operations of
$1.5 million. This was partially offset by impairment charges of $4.6 million
on two facilities sold during 1999, losses of $4.4 million from the facilities
that were divested during the three months ended September 30, 1999, improvement
in the operations of the facilities that comprise ongoing operations of $1.2
million and a reduction of $4.3 million in interest expense due to reductions in
debt. Additionally, equity in earnings increased $0.7 million due primarily to
a non-consolidating entity which opened in May 1999.
Revenues decreased 6.2% to $301.3 million in the three months ended
September 30, 2000 compared to $321.3 million in the three months ended
September 30, 1999. Revenues declined primarily as a result of the facilities
that were sold or closed. These facilities had revenues of $46.7 million in the
three months ended September 30, 1999. The decrease in revenues was partially
offset by a 9.8% increase for the facilities that comprise ongoing operations.
For the three months ended September 30, 2000 compared to the three months ended
September 30, 1999, admissions for the ongoing operations increased 7.3%,
adjusted admissions from ongoing operations increased 8.0%, and revenues per
adjusted admissions from ongoing operations increased 1.7%. In addition,
outpatient visits increased 5.1%, outpatient revenues per outpatient visit
remained relatively constant and surgeries increased 4.8%. Acuity levels for
outpatient services decreased in the three months ended September 30, 2000
compared to the three months ended September 30, 1999.
Salaries and benefits, as a percentage of revenues, decreased to 41.6% in
the three months ended September 30, 2000 from 42.0% in the three months ended
September 30, 1999. For the three months ended September 30, 1999, salaries and
benefits for the facilities sold or closed were $23.2 million. Salaries and
benefits for ongoing operations increased 1.0% as a percentage of revenue in the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999. Costs per full time equivalent increased 9.3% in the three
months ended September 30, 2000 compared to September 30, 1999, while labor
productivity improved.
Supply costs decreased as a percentage of revenues to 14.8% in the three
months ended September 30, 2000 from 15.2% in the three months ended September
30, 1999. For the three months ended September 30, 1999, supplies for the
facilities sold or closed were $7.3 million. Supplies for ongoing operations
decreased 0.3% as a percentage of revenue in the three months ended September
30, 2000 compared to the three months ended September 30, 1999, primarily from
rebates received through a group purchasing organization.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes), decreased as a percentage of revenues to 21.1%
in the three months ended September 30, 2000 compared to 22.5% in the three
months ended September 30, 1999. For the three months ended September 30, 1999,
other operating expenses for the facilities sold or closed were $13.8 million.
Other
22
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
operating expenses for ongoing operations decreased 0.7% as a percentage
of revenue in the three months ended September 30, 2000 compared to the three
months ended September 30, 1999 due primarily to increases in revenues.
Provision for doubtful accounts, as a percentage of revenues, increased to
9.4% in the three months ended September 30, 2000 compared to 8.1% in the three
months ended September 30, 1999. Provision for doubtful accounts for the
facilities sold or closed decreased $2.5 million in the three months ended
September 30, 2000 compared to the three months ended September 30, 1999.
Provision for doubtful accounts for ongoing operations increased 0.8% as a
percentage of revenue in the three months ended September 30, 2000 compared to
the three months ended September 30, 1999. This was due primarily to
adjustments in estimates at three facilities.
Depreciation and amortization decreased as a percentage of revenues to 6.9%
in the three months ended September 30, 2000 from 7.6% in the three months ended
September 30, 1999, primarily due to $5.0 million in 1999 depreciation for the
facilities sold or closed. This was partially offset by an increase in
depreciation of $1.5 million from completion of certain construction projects.
Interest expense, which is offset by $1.6 million and $0.8 million of
interest income in the three months ended September 30, 2000 and 1999,
respectively, decreased to $14.4 million in the three months ended September
30, 2000 from $18.7 million in the three months ended September 30, 1999 due to
the payoff of debt with the proceeds of sale of ten facilities during 1999.
Gain on sale of assets was $16.9 million during the three months ended
September 30, 1999 due primarily to the sale of five facilities during the
quarter.
Minority interests, which are primarily related to one joint venture in
Arizona that includes 9 ambulatory surgery centers, as a percentage of revenues
remained relatively unchanged in the three months ended September 30, 2000
compared to the three months ended September 30, 1999.
Equity in earnings (loss) of affiliates was $(0.2) million for the three
months ended September 30, 2000 compared to $(0.9) million for the three months
ended September 30, 1999. This was due primarily to reduction in losses of $1.6
million for one non-consolidating entity which opened in May 1999.
Nine Months Ended September 30, 2000 and 1999
Income before income taxes increased to $18.6 million in the nine months
ended September 30, 2000 from a loss of $58.9 million in the nine months ended
September 30, 1999. The increase in pretax income was attributable to a $4.2
million gain on sale of a joint venture interest during the nine months ended
September 30, 2000 and impairment charges of $38.5 million in the nine months
ended September 30, 1999. Additional factors contributing to the increase were
losses before impairment charges of $39.8 million for the nine months ended
September 30, 1999 in the facilities that were divested and improvement in the
operations of the facilities that comprise ongoing operations of $9.0 million,
$7.8 million favorable prior year cost report settlements and contractual
estimates during the nine months ended September 30, 2000 and a $4.1 million
increase in equity in earnings primarily due to one non-consolidating entity
which opened in May 1999. These increases were partially offset during the nine
months ended September 30, 2000 by $16.9 million gain on sale of five
facilities in 1999, $5.2 million of unfavorable contractual adjustments at one
facility, $1.5 million of unfavorable adjustments at one facility from write-
offs of certain expenses that were previously capitalized and other adjustments
and $1.1 million of unfavorable adjustments in equity in earnings at a non-
consolidating entity from various changes of estimates and other adjustments.
Revenues decreased 11.0% to $915.4 million in the nine months ended
September 30, 2000 compared to $1,029.0 million in the nine months ended
September 30, 1999. Revenues declined primarily as a result of the facilities
that were sold or closed. In the nine months ended September 30, 1999, these
facilities had revenues of $186.0 million. For the nine months ended September
30, 2000, the facilities that were sold or closed had revenues which included
$3.1 million in favorable prior year cost report contractual estimates. The
decrease in revenues was partially offset by an 8.1% increase for the facilities
that comprise ongoing operations. For the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999, admissions for the ongoing
operations increased 4.2%, adjusted admissions from ongoing operations increased
5.7%, and revenues per adjusted admissions from ongoing operations increased
2.0%. Additionally, outpatient visits increased 3.5%, outpatient revenues per
visit increased 3.6% and surgeries increased 7.3%. Another factor was $4.7
million in favorable prior year cost report settlements and
23
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
contractual estimates during the nine months ended September 30, 2000. The
increases were partially offset by an unfavorable $5.2 million change in
estimate for contractual discounts at one facility.
Salaries and benefits, as a percentage of revenues, decreased to 41.1% in
the nine months ended September 30, 2000 from 42.6% in the nine months ended
September 30, 1999. For the nine months ended September 30, 2000 and 1999,
salaries and benefits for the facilities sold or closed were $2.4 million and
$95.0 million, respectively. The salaries and benefits for the sold and closed
facilities during the nine months ended September 30, 2000 were primarily
related to severance costs associated with the closure of one facility in
February 2000. Salaries and benefits for ongoing operations increased to 41.3%
as a percentage of revenue in the nine months ended September 30, 2000 compared
to 40.7% in the nine months ended September 30, 1999. Salaries and benefits
increased due to a 4.1% increase in costs per full time equivalent and the
addition of corporate staff after the Spin-off in the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999. These
increases were partially offset by $2.8 million from a favorable adjustment
relating to Triad's retirement plan contributions during the nine months ended
September 30, 2000 and increases in labor productivity.
Supply costs increased as a percentage of revenues to 14.9% in the nine
months ended September 30, 2000 from 14.7% in the nine months ended September
30, 1999. For the nine months ended September 30, 1999, supplies for the
facilities sold or closed were $28.4 million. Supplies for ongoing operations
increased 0.4% as a percentage of revenue in the nine months ended September 30,
2000 compared to the nine months ended September 30, 1999. This increase was
attributable to higher patient acuity and price increases. Additionally, an
unfavorable adjustment of $1.1 million was recorded at one facility from write-
offs of certain expenses that were previously capitalized during the nine months
ended September 30, 2000.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes), decreased as a percentage of revenues to 21.1%
in the nine months ended September 30, 2000 compared to 22.7% in the nine months
ended September 30, 1999. For the nine months ended September 30, 1999, other
operating expenses for the facilities sold or closed were $52.5 million. Other
operating expenses for ongoing operations decreased 0.6% as a percentage of
revenue in the nine months ended September 30, 2000 compared to the nine months
ended September 30, 1999. This decrease was due primarily to the increase in
revenues.
Provision for doubtful accounts, as a percentage of revenues, decreased to
8.5% in the nine months ended September 30, 2000 compared to 9.1% in the nine
months ended September 30, 1999. Provision for doubtful accounts for the
facilities sold or closed decreased $22.9 million in the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999.
Provision for doubtful accounts for ongoing operations remained relatively
constant as a percentage of revenue in the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999.
Depreciation and amortization decreased as a percentage of revenues to 6.8%
in the nine months ended September 30, 2000 from 7.6% in the nine months ended
September 30, 1999, primarily due to $17.6 million in 1999 depreciation for the
facilities sold or closed.
Interest expense allocated from HCA, which was represented by interest
incurred on the net intercompany balance with HCA, was $22.5 million in the nine
months ended September 30, 1999. The intercompany balances were eliminated at
the Spin-off.
Interest expense, which is offset by $4.5 million and $1.5 million of
interest income in the nine months ended September 30, 2000 and 1999,
respectively, increased to $42.9 million in the nine months ended September 30,
2000 from $28.3 million in the nine months ended September 30, 1999 due to the
assumption of additional debt from HCA in the Spin-off.
Management fees allocated from HCA were $8.9 million during the nine months
ended September 30, 1999. No management fees were allocated during the nine
months ended September 30, 2000 due to the Spin-off from HCA.
Gain on sale of assets was $4.6 million during the nine months ended
September 30, 2000 primarily due to the sale of Triad's partnership interest in
a rehabilitation hospital during the period. Gain on sale of assets was $16.9
million during the nine months ended September 30, 1999 due primarily to the
sale of five facilities during the period.
24
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Impairments on long-lived assets were $0.9 million and $38.5 million during
the nine months ended September 30, 2000 and 1999, respectively. The
impairments during 2000 were due to the carrying value of the long-lived assets
related to one physician management contract being reduced to fair value, based
on estimated disposal value. The impairments during 1999 were due to reductions
of the book value of certain facilities that Triad divested during 1999 to fair
value, based on estimates of selling values.
Minority interests, which are primarily related to one joint venture in
Arizona that includes 9 ambulatory surgery centers, as a percentage of revenues
remained relatively unchanged in the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999.
Equity in earnings (loss) of affiliates was $(0.6) for the nine months
ended September 30, 2000 compared to $(2.4) for the nine months ended September
30, 1999. This was due to reduction in losses of $4.1 million for one non-
consolidating entity which opened in May 1999. This was offset by $1.1 million
of unfavorable adjustments for various changes of estimates and other
adjustments at one non-consolidating entity during the nine months ended
September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $62.4 million in the nine months
ended September 30, 2000 compared to $132.1 million in the nine months ended
September 30, 1999. The decrease was due to a decrease in accounts payable and
other current liabilities and an increase in inventories and other assets. This
was offset by a smaller increase in accounts receivable in the nine months ended
September 30, 2000 than in the nine months ended September 30, 1999.
Cash used in investing activities was $101.7 million in the nine months
ended September 30, 2000 compared to $71.0 million in the nine months ended
September 30, 1999. This was due primarily to $70.8 million in proceeds received
on the sale of three facilities in September 1999 and expenditures on the
partial closing of an acquisition of $69.0 million in September 2000. This was
partially offset by $40.7 million of loan repayments from one of Triad's
hospital joint ventures which was offset by $13.3 of advances, during the nine
months ended September 30, 2000 compared to $57.9 million in advances to this
hospital joint venture during the nine months ended September 30, 1999.
Additionally, capital expenditures decreased $38.6 million from the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
Triad expects to expend approximately $40 million ($30 million for expansion) in
capital expenditures for the remainder of 2000 and $120 million ($90 million for
expansion) in 2001.
Cash used in financing activities was $13.5 million in the nine months
ended September 30, 2000 compared to cash provided by financing activities of
$1.1 million in the nine months ending September 30, 1999. This was due to
changes in the intercompany balances with HCA during the nine months ended
September 30, 1999. This was partially offset by repayments on long term debt
from asset sale proceeds during September 1999 and a $10.8 million decrease in
distributions to minority partners.
Triad received loan repayments from one of its hospital joint ventures of
$37.0 million on February 28, 2000 and $3.7 million on April 11, 2000.
On March 31, 2000 Triad sold its limited partnership interest in a
rehabilitation hospital located in Tucson, Arizona for $4.0 million. A gain of
$4.2 million was recognized on the sale.
On April 28, 2000, Triad purchased 28.7 acres of land for $2.5 million in
Las Cruces, New Mexico for future development. This project is expected to
commence in early 2001 with projected costs of approximately $60 million over a
12 month period. The project will be funded with either operating cash flows or
existing credit facilities.
On June 1, 2000, Triad's partner in an ambulatory surgery center joint
venture in Arizona contributed the assets of an ambulatory surgery center to the
joint venture. Triad purchased a majority interest in these assets for $0.6
million.
On June 23, 2000, Triad signed a definitive purchase agreement to acquire
hospitals in Denton, Texas and Lewisburg, West Virginia from NetCare Health
Systems, Inc. for a cash price of approximately $107.0 million plus
approximately $10.0 million in working capital. The definitive agreement also
includes the acquisition of a hospital in Statesville, North Carolina, but Triad
has assigned the rights to acquire this hospital to a third party in a
simultaneous closing. On September 29, 2000, Triad completed the closing of the
Denton, Texas and Statesville, North Carolina hospitals. The effective date of
the Denton, Texas acquisition was October 1, 2000. Triad paid $69.0 million at
the
25
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
closing as a partial payment on the acquisition of the Denton, Texas and
Lewisburg, West Virginia hospitals, which was recorded in other current assets.
On October 31, 2000, Triad paid $48.0 million as the final payment on the
acquisition and closed on the Lewisburg, West Virginia hospital. The final
closing was funded by operating cash and a $24.0 million draw on its new term
loan described below. For the three months ended September 30, 2000 and 1999,
these facilities had net revenues of $23.2 million and $23.0 million,
respectively, and pretax income of $2.6 million and $3.6 million, respectively.
For the nine months ended September 30, 2000 and 1999, these facilities had net
revenues of $72.7 million and $65.7 million, respectively, and pretax income of
$10.3 million and $11.7 million, respectively.
On July 27, 2000, Triad purchased 47 acres of undeveloped land in Sherman,
Texas for $2.0 million. This land was not included in the sale of the hospital.
Triad is currently in process of selling this land.
On September 28, 2000, Triad's bank credit facility was amended to add a
$200 million delayed draw term loan, which can be drawn upon in up to ten
advances from the date of the amendment until one year after the amendment.
Principal payments on amounts outstanding at the end of the delay draw term
period are due quarterly beginning February 2002 until May 2005. The delay draw
term loan bears interest at LIBOR plus 3.0%. No advances were made as of
September 30, 2000. The amendment also modifies the requirements under certain
financial ratios and tests and the restrictions on assets sales and capital
expenditures. In conjunction with the amendment, Triad paid $1.5 million in
debt issue costs, which will be amortized over the life of the loan.
Triad has a $125.0 million line of credit which bears interest at LIBOR
plus 3.0%, of which approximately $2.5 million has been allocated to letters of
credit securing certain lease obligations. No amounts were outstanding under the
revolving credit facility at September 30, 2000.
In January 1999, Triad entered into a fifteen year lease with an
unaffiliated party for the operations of two acute care hospitals and three
ambulatory surgery centers, with lease payments of approximately $17.0 million
per year. The lessee has an option to purchase the facilities exercisable
annually beginning in January 2001 for approximately $130.0 million in January
2001. The lessee has notified Triad that it does not intend to exercise its
option in January 2001, although it may do so in the future.
Triad announced on October 19, 2000 that it entered into an agreement to
acquire Quorum for approximately $2.4 billion in cash, stock and assumption of
debt. Under the terms of the agreement, Quorum shareholders will receive $3.50
in cash and 0.4107 shares of Triad common stock for each outstanding share of
Quorum stock. After the transaction Triad will have revenues of approximately
$3.0 billion, 53 hospitals, 14 ambulatory surgery centers and 9,479 licensed
beds.
The transaction is subject to approval of each company's shareholders,
antitrust clearance and other conditions customary for transactions of this
type. The transaction is also conditioned upon Triad's receipt of a private
letter ruling from the Internal Revenue Service that the transaction will not
alter the tax-free nature of the Spin-off from HCA and is further conditioned
upon the receipt of necessary financing. Triad has received a financing
commitment of $1.7 billion from its investment banker to fund the cash purchase
price and to refinance certain existing debt of both companies.
Upon consummation of the transaction, Triad's board of directors will be
increased by two members of Quorum's current board. Triad expects that the
transaction will be completed in the first half of 2001.
At September 30, 2000, Triad had working capital of $241.6 million.
Management expects that operations and working capital facilities will provide
sufficient liquidity for the remainder of fiscal 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which was required to be adopted in years
beginning after June 15, 1999. In May 1999, the effective date of SFAS 133 was
deferred until years beginning after June 15, 2000. Because of Triad's minimal
use of derivatives, management does not anticipate that the adoption of the new
statement will have a significant effect on the results of operations or the
financial position of Triad.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"), which was required to be adopted in the first quarter of years beginning
after December 15, 1999. In June 2000, the effective date of SAB 101 was
delayed until the fourth
26
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
quarter of 2000 for years beginning after December 15, 1999. Management does not
anticipate that the application of SAB 101 will have a significant effect on the
results of operations or the financial position of Triad.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"), which became effective on July 1, 2000 covering transactions
occurring after December 15, 1998. FIN 44 clarifies the application of APB
Opinion No. 25 relating to the definition of an employee, criteria for
determining whether a plan qualifies as a noncompensatory plan, accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. Management does not anticipate that the application
of FIN 44 will have a significant effect on the results of operations or the
financial position of Triad.
CONTINGENCIES
On October 20, 2000, a class action lawsuit was filed against Triad and the
Board of Directors of Quorum in the Circuit Court of Davidson County, Tennessee,
on behalf of all public stockholders of Quorum. The complaint alleges that
Quorum's directors breached their fiduciary duties of loyalty and due care by
failing to implement reasonable procedures designed to maximize shareholder
value and to obtain the highest price reasonably available for Quorum's
shareholders. The complaint alleges that Triad aided and abetted Quorum's
directors' breach of their fiduciary duties. The complaint seeks an injunction
preventing consummation of the acquisition, or Quorum's business combination
with any third party, until Quorum adopts and implements a procedure or process,
such as an auction, to obtain the highest possible price for Quorum.
Alternatively, the complaint seeks compensatory damages in the event the
acquisition is consummated. The complaint also seeks an award of costs and
attorneys' fees. Triad believes the claims are without merit and will
vigorously defend the action.
HCA is currently the subject of several federal investigations into certain
of its business practices, as well as governmental investigations by various
states. Management understands that HCA is cooperating in these investigations
and that HCA believes, through written notice and other means, that it is a
target in these investigations. Given the breadth of the ongoing investigations,
management understands that HCA expects additional subpoenas and other
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future. HCA is a defendant in several qui tam actions
brought by private parties on behalf of the United States of America, which have
been unsealed and served on HCA. The actions allege, in general, that HCA and
certain subsidiaries and/or affiliated partnerships violated the False Claims
Act for improper claims submitted to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving false claims) presented by the defendants to the federal
government, civil penalties of not less than $5,000 nor more than $10,000 for
each such Medicare or Medicaid claim, attorneys' fees and costs. To Triad's
knowledge, the government has intervened in at least seven qui tam actions
against HCA. HCA is aware of additional qui tam actions that remain under seal
and believes that there are other sealed qui tam cases of which it is unaware.
On May 5, 2000, Triad was advised that one of such qui tam actions which had
recently been partially unsealed, United States of America (ex.rel.Lanni) v.
Curative Health Services. et. al. (98 Civ. 2501, S.D.N.Y., August 24, 1999),
listed three of its hospitals as among the various named defendants. This qui
tam action alleges various violations arising out of relationships between
Curative Health Services and the other defendants. Two of the three Triad
hospitals included as defendants ended their relationship with Curative Health
Services prior to the Spin-off, while the third hospital maintains an ongoing
relationship with Curative.
On May 18, 2000, HCA announced that it had reached an understanding with
the Civil Division of the United States Department of Justice to recommend to
settle, subject to certain conditions, the civil claims against HCA relating to
diagnosis related group coding, outpatient laboratory billing and home health
issues. The understanding with the Department of Justice would require HCA to
pay $745 million in compensation to the government, with interest at a fixed
rate of 6.5% per annum and would reduce HCA's existing letter of credit
agreement with the government from $1 billion to $250 million at the time of the
payment of the settlement. It remains too early to predict the effect of the
outcome of any of the ongoing investigations or qui tam and other actions, or
whether any additional investigations or litigations will be commenced. If HCA
is found to have violated federal or state laws relating to Medicare, Medicaid
or similar programs, HCA could be subject to substantial monetary fines, civil
and criminal penalties, and exclusion from participation in the Medicare and
Medicaid programs. Similarly, the amounts claimed in the qui tam and other
actions may be substantial, and HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions.
27
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HCA is a defendant in a number of other suits, which allege, in general,
improper and fraudulent billing, overcharging, coding and physician referrals
(including the investigations not covered by the understanding), as well as
other violations of law. Certain of the suits have been conditionally certified
as class actions.
Management believes that the ongoing governmental investigations and related
media coverage may have had a negative effect on HCA's results of operations,
which includes Triad for the periods prior to the Spin-off which are presented
herein. The extent to which Triad may or may not continue in the future to be
affected by the ongoing investigations of HCA, the initiation of additional
investigations, if any, and the related media coverage cannot be predicted.
Pursuant to the distribution agreement entered into by and among HCA and
Triad in connection with the Spin-off, HCA has agreed to indemnify Triad in
respect of any losses which it may incur as a result of the proceedings
described above, and Triad would not be required to contribute any part of HCA's
payment pursuant to the settlement understanding. If any of such indemnified
matters were successfully asserted against Triad, or any of its facilities, and
HCA failed to meet its indemnification obligations then such losses could have a
material adverse effect on the business, financial position, results of
operations or prospects of Triad. HCA will not indemnify Triad for losses
relating to any acts, practices and omissions engaged in by Triad after the date
of the Spin-off, whether or not Triad is indemnified for similar acts, practices
and omissions occurring prior to the date of the Spin-off.
HCA has also agreed to indemnify Triad in respect of any losses which it may
incur as a result of proceedings which may be commenced by government
authorities or by private parties in the future that arise from acts, practices
or omissions engaged in prior to the Spin-off and related to the proceedings
described above. HCA has also agreed that, in the event that any hospital owned
by Triad is permanently excluded from participation in the Medicare and Medicaid
programs as a result of the proceedings described above, then HCA will make a
cash payment to Triad in an amount, if positive, equal to five times the
excluded hospital's 1998 income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-lived
assets, minority interests and income taxes, as set forth on a schedule to the
distribution agreement, less the net proceeds of the sale or other disposition
of the excluded hospital. Triad has agreed that, in connection with the pending
governmental investigations described above, it will participate with HCA in
negotiating one or more compliance agreements setting forth each of their
agreements to comply with applicable laws and regulations (and one of the
conditions to the settlement understanding is the execution by HCA and the
federal government of a corporate integrity agreement). If any of such
indemnified matters were successfully asserted against Triad, or any of its
facilities, and HCA failed to meet its indemnification obligations, then such
losses could have a material adverse effect on the business, financial position,
results of operations or prospects of Triad. HCA will not indemnify Triad for
losses relating to any acts, practices and omissions engaged in by Triad after
the Spin-off, whether or not Triad is indemnified for similar acts, practices
and omissions occurring prior to the Spin-off.
Triad is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of, or
interference with, physicians' staff privileges. In certain of these actions the
claimants may seek punitive damages against Triad, which are usually not covered
by insurance. It is management's opinion that the ultimate resolution of these
pending claims and legal proceedings will not have a material adverse effect on
Triad's results of operations or financial position.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed to Congress and in some state legislatures that would
significantly affect health care systems in Triad's markets. The cost of certain
proposals would be funded, in significant part, by reduction in payments by
government programs, including Medicare and Medicaid, to health care providers
(similar to the reductions incurred as part of the Balanced Budget Act as
previously discussed). While Triad is unable to predict whether any proposals
for health care reform will be adopted, there can be no assurance that proposals
adverse to the business of Triad will not be adopted.
28
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Triad is exposed to market risk related to changes in interest rates. No
derivatives are currently used to alter the interest rate characteristics of
Triad's debt instruments.
With respect to Triad's interest-bearing liabilities, approximately $218.0
million of long-term debt at September 30, 2000 is subject to variable rates of
interest, while the remaining balance in long-term debt of $323.5 million at
September 30, 2000 is subject to fixed rates of interest. The estimated fair
value of Triad's total long-term debt was $550.5 million at September 30, 2000.
The estimates of fair value are based upon the quoted market prices for the same
or similar issues of long-term debt with the same maturities. Based on a
hypothetical 1% increase in interest rates, the potential annualized losses in
future pretax earnings would be approximately $2.2 million. The impact of such a
change in interest rates on the carrying value of long-term debt would not be
significant. The estimated changes to interest expense and the fair value of
long-term debt are determined considering the impact of hypothetical interest
rates on Triad's borrowing cost and long-term debt balances. These analyses do
not consider the effects, if any, of the potential changes in Triad's credit
ratings or the overall level of economic activity. Further, in the event of a
change of significant magnitude, management would expect to take actions
intended to further mitigate its exposure to such change.
29
<PAGE>
Part II - Other Information
Item 6: Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
Exhibit Number Description
-------------- -----------
2.1* Agreement and Plan of Merger, dated as of October 18, 2000, by
and between Quorum HealthGroup, Inc. and Triad Hospitals, Inc.
(the "Merger Agreement"). Incorporated by reference from Triad
Hospitals' Current Report on Form 8-K dated October 18, 2000.
3.1 Certificate of Incorporation of Triad. Incorporated by
reference from Triad Hospitals' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
3.2 By-Laws of Triad. Incorporated by reference from Triad
Hospitals' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
3.3 Certificate of Incorporation of Triad Holdings. Incorporated by
reference from Triad Hospitals' Annual Report on Form 10-K for
the year ended December 31, 1999.
3.4 By-Laws of Triad Holdings. Incorporated by reference from Triad
Hospitals' Annual Report on Form 10-K for the year ended
December 31, 1999.
10.1 Amendment No. 1 dated as of September 28, 2000, to the Credit
Agreement, dated as of May 11, 1999 among Healthtrust, Inc. -
The Hospital Company and certain subsidiaries from time to time
party thereto, as Borrower, the several lenders from time to
time thereto, Citicorp USA, Inc. and The Chase Manhattan Bank
as syndication agents, Credit Lyonnais New York Branch and
Societe Generale as co-agents, Bank of America National Trust
and Savings Association as administrative agent and Nations
Banc Montgomery Securities, LLC as lead arranger and sale back
manager.
27.1 Financial Data Schedule for Triad (for Commission use only).
27.2 Financial Data Schedule for Triad Holdings (for Commission use
only).
*Triad hereby agrees to furnish supplementally a copy of any omitted exhibits
to, and schedules delivered in connection with, the Merger Agreement to the SEC
upon request.
(b) Reports on Form 8-K filed during the quarter ended September 30, 2000:
None
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Triad Hospitals, Inc.
Date: November 13, 2000 By: /s/ BURKE W. WHITMAN
---------------------
Burke W. Whitman
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Triad Hospitals Holdings, Inc.
Date: November 13, 2000 By: /s/ BURKE W. WHITMAN
----------------------
Burke W. Whitman
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
31
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
2.1* Agreement and Plan of Merger, dated as of October 18, 2000, by
and between Quorum HealthGroup, Inc. and Triad Hospitals, Inc.
(the "Merger Agreement"). Incorporated by reference from Triad
Hospitals' Current Report on Form 8-K dated October 18, 2000.
3.1 Certificate of Incorporation of Triad. Incorporated by
reference from Triad Hospitals' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
3.3 By-Laws of Triad. Incorporated by reference from Triad
Hospitals' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
3.5 Certificate of Incorporation of Triad Holdings. Incorporated by
reference from Triad Hospitals' Annual Report on Form 10-K for
the year ended December 31, 1999.
3.6 By-Laws of Triad Holdings. Incorporated by reference from Triad
Hospitals' Annual Report on Form 10-K for the year ended
December 31, 1999.
10.1 Amendment No. 1 dated as of September 28, 2000, to the Credit
Agreement, dated as of May 11, 1999 among Healthtrust, Inc. -
The Hospital Company and certain subsidiaries from time to time
party thereto, as Borrower, the several lenders from time to
time thereto, Citicorp USA, Inc. and The Chase Manhattan Bank
as syndication agents, Credit Lyonnais New York Branch and
Societe Generale as co-agents, Bank of America National Trust
and Savings Association as administrative agent and Nations
Banc Montgomery Securities, LLC as lead arranger and sale back
manager.
27.1 Financial Data Schedule for Triad (for Commission use only).
27.2 Financial Data Schedule for Triad Holdings (for Commission use
only).
*Triad hereby agrees to furnish supplementally a copy of any omitted exhibits
to, and schedules delivered in connection with, the Merger Agreement to the SEC
upon request.
(b) Reports on Form 8-K filed during the quarter ended September 30, 2000:
None
32
